Steller: Arizona could raise revenue, cut less

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January 31, 2015 7:11 pm • By Tim Steller
In his first week on the job, Gov. Doug Ducey projected a sense of crisis wrapped in a can-do attitude for solving it.
“All of us have arrived here to find serious challenges waiting on us,” Ducey told legislators during his State of the State address. “The test is whether we answer them in a serious way, without trying to buy time, or to sidestep obvious problems that need to be dealt with right away.”

When he released his budget days later, it became clear that he thinks the serious way to balance Arizona’s budget and boost our economy is by cutting spending. This, in a state where general-fund spending is about 9 percent lower than it was in 2007 despite the state growing by at least 500,000 people, or 8 percent, to 6.7 million in that time.

What went largely unexamined as Ducey unveiled his plans was the fact that the budget crisis is a politically generated one. It was created by Republican Ducey’s no-new-taxes pledge, a position he shared with Democratic challenger Fred DuVal. Ducey went further in his campaign, though, proposing reducing income taxes as close to zero as possible.

The truth, apparently unspeakable in Phoenix, is that Arizona could raise revenue in a variety of ways, and in amounts that could cover obligations to education and other public services.

“If you set aside the politics, there’s actually a long list of revenue sources you could tap,” said Tom Rex, an economist at Arizona State University’s Seidman Research Institute who has long studied Arizona’s finances. “The only thing I wouldn’t put on the table is anything that hurts business. You could increase personal income taxes; you could expand the sales tax base; you could reinstate a statewide property tax.”

Whether Arizona cuts a billion in spending — that’s the scale of next year’s projected shortfall — or raises revenue by that much, the effect on the economy is likely to be similar, Rex said.

“The impact is slightly worse if you do a spending cut than if you do a revenue increase. Either way, it’s not much of an impact,” Rex said.

Having won handily in November, though, Ducey’s trying to put in place the program that he proposed in the campaign. That’s fair. But of course it leaves Arizona’s needs unmet until the hoped-for increase in economic growth leads to the prayed-for jump in tax revenue. The most prominent need, of course, being the schools, which a judge says have been shorted about $330 million per year.

The theory is that cutting taxes and spending will improve the economy so much that it will bring in additional tax revenue.

“The best way to stabilize the state and be able toState's invest more in things like education is to grow and expand our economy,” Ducey spokesman Daniel Scarpinato told me Friday. “That’s why everything he’s doing from a policy perspective is built around how do we ensure Arizona is the best place to work and do business.”

But it’s hard to square that aim with maintaining some of the exemptions the Legislature has carved out over the years to the state’s 5.6 percent sales tax, exemptions that total billions in lost revenue. In 2013, the Arizona Department of Revenue listed them and the amount they would have generated that year if taxed. Some examples:

Sales of livestock and poultry feed, salts and vitamins for livestock or poultry consumption sold to people engaged in producing livestock, poultry or products. Revenue lost: $17 million.
Sales of pipes or valves 4 inches in diameter or larger used to transport oil, natural gas, artificial gas, water or coal slurry. Revenue lost: $6 million.
Retail sales to a manufacturer, modifier, assembler or repairer if the end product is sold to the U.S. government and retail sales to the U.S. government by a manufacturer, modifier, assembler or repairer and other retail sales made directly to the U.S. government. Revenue lost: $182 million.
Sales of warranty or service contracts. Revenue lost: $35 million.
That’s about $240 million lost in one year right there, and there are dozens more exemptions. Some of them make sense — food for consumption at home is one of the biggest. But many make no particular sense except when you remember who has the money to hire lobbyists and fund campaigns to get the sales of their favored product exempted from taxation.

“Why should we be giving a tax break for oil and gas drilling equipment in Arizona?” asked Sen. Steve Farley, a Tucson Democrat who has long championed closing these loopholes. “Everything’s piecemeal right now, and it’s all about who has the better lobbyists. That’s not the way to create a rational revenue structure.”

But exemptions are just one area where there is room to raise revenue. Arizona’s general-fund spending, as a percentage of state residents’ income, is as low now as it has been in at least 35 years. This fiscal year, that figure is about 3.6 percent, the Joint Legislative Budget Council reported last year.

That’s down from about 4.7 percent at its highest point under Democratic Gov. Janet Napolitano in 2007 and down from a peak of 5.1 percent under Republican Gov. Fife Symington in 1992, the highest it’s been since 1979 if not before. So our state is not spending much compared with what residents are making.

That’s in part because we don’t pay much in income taxes. The highest rate in the state is 4.54 percent for those who make more than $150,000, and the lowest is 2.59 percent for those who make under $10,000. Two of our prosperous neighboring states have flat income-tax rates for everyone that are higher than our top rate: Colorado’s rate is 4.63 percent, and Utah’s rate is 5 percent.

We could raise income tax rates in ways that keep Arizona’s rates competitive but also raise a lot of money. This, of course, is not in the cards with Ducey newly in office with his anti-tax mandate.

“He just ran and said he not only wasn’t going to increase them (taxes); he’s going to decrease them,” noted Kevin McCarthy, president of the Arizona Tax Research Association. “I don’t think the mood in his office or legislative leadership for that matter is going to be toward turning over rocks” looking for revenue sources.

That’s too bad, because the pain of cutting a billion in spending from an already tight budget is likely to be more severe and damaging than the mild discomfort of raising revenue responsibly.